Sources of raising finance may be classified under the following categories: 1. Traditional Sources 2. Institutional Sources.
1. Traditional Sources:
The main sources for raising capital by industrial concerns are as follows:
a. Public Investments:
This is the important method for raising funds in India. Both ‘share capital’ and ‘loan capital’ are included in public investment. This investment generally represents 90 per cent capital of any industrial capital structure.
b. Public Deposits:
One of the traditional methods of raising funds in India has been that of receiving public deposits. As early as in 1931, Indian Central Banking Enquiry Committee accepted the importance of public deposits in our economic system, particularly in so far as textile industry was concerned.
The companies have been inviting more funds from the public, by way of deposits by offering higher rates of interests than what is normally offered by the banks. The companies always prefer to accept public deposits for meeting their financial needs, than approaching banks or other public financial bodies.
Companies generally receive public deposits for different periods ranging from 6 months to 10 years. The rate of interest on the deposits varies from 10 per cent per annum to 15 per cent per annum depending upon the period of deposits and the reputation of the company.
c. Ploughing Back of Profits:
The process of creating corporate savings and their utilisation in the business is technically called ‘ploughing back of profits’. It is an ideal method of financing special working capital needs of a company.
d. Managing Agents:
It is also an important method for raising capital by industrial concerns. These agents purchase the shares of companies, provide loans and by placing securities of the companies, on the market they perform the functions of the underwriters.
e. Central and State Governments:
Government also provide financial assistance to the industries. Some industries are set up by government itself. There are some industries which are promoted and financed by government. The assistance extended by government include both ‘Loans’ and ‘Grants’.
f. Foreign Capital:
It is also an important method of raising funds. This capital can be in the form of loans, grants, machinery, etc.
2. Institutional Sources:
Following are the main institutional sources for raising capital by industrial concerns:
a. Commercial Banks:
Commercial banks provide short-term funds to industrial concerns. They give direct loans as advances, overdrafts or cash credits and through the discount of commercial papers.
b. Insurance Companies:
Insurance companies have also made a great contribution in providing capital to the industrial concerns. These companies invest their capital in the shares and debentures of the industrial concerns.
c. Stock Exchange:
There has been a great contribution of stock exchange in Indian industrial concerns. Though stock exchange does not provide direct capital help but it helps in listing the securities of the companies and provides the market for their sales.
d. Reserve Bank and State Bank:
These banks have also contributed to the industrial concerns. Import, export, capital market, etc. are managed and controlled by these banks.